Question

Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	12
Direct labor	$	3
Variable manufacturing overhead	$	1
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	324,000
Fixed selling and administrative expenses	$	234,000

During the year, the company produced 27,000 units and sold 23,000 units. The selling price of the company’s product is $42 per unit.

Required:

1. Assume that the company uses absorption costing:

a. Compute the unit product cost.

b. Prepare an income statement for the year.

2. Assume that the company uses variable costing:

a. Compute the unit product cost.

b. Prepare an income statement for the year.

Answer 1

1. Assume that the company uses absorption costing:

a. Compute the unit product cost.

Direct material	12
Direct labour	3
Variable manufacturing overhead	1
Fixed manufacturing overhead (324000/27000)	12
Total unit product cost	28

b. Prepare an income statement for the year.

Sales (23000*42)	966000
Cost of goods sold (23000*28)	(644000)
Gross profit	322000
Selling and administrative expense (23000*1+234000)	(257000)
Net operating income	65000

2. Assume that the company uses Variable costing:

a. Compute the unit product cost.

Direct material	12
Direct labour	3
Variable manufacturing overhead	1
Total unit product cost	16

b. Prepare an income statement for the year.

Sales (23000*42)	966000
Variable Cost of goods sold (23000*16)	(368000)
Variable selling and administrative expense	(23000)
Contribution margin	575000
Fixed manufacturing overhead	(324000)
Fixed Selling and administrative expense	(234000)
Net operating income	17000